Managing the Tax Impact of Business Transactions
At some point during its lifespan, every growing business will confront the decision of whether to acquire another business, merge with a competitor, purchase capital assets, or expand into new markets. There are a multitude of factors underlying the analysis of the best way to approach these, and similar, major business transactions. Not least among those factors is the tax impact of the transaction.
The Internal Revenue Code is replete with provisions enacted to facilitate business transactions and to curb perceived abuses, and many of these provisions are discretionary; a business can elect their application or not. As a result, for tax purposes, business owners are left with a dizzying variety of paths to take when they are seeking to reorganize or expand their business.
Trusted legal counsel with extensive federal tax and corporate experience is essential for a business looking to reorganize or expand. The attorneys at Fuerst Ittleman David & Joseph have extensive experience in guiding businesses in complex transactions, from single-owner sole-proprietorships to large, publicly traded companies. Among the firm’s areas of expertise and focus are:
- Mergers and acquisitions. We have the experience and practical knowledge to guide acquiring or target companies in mergers and acquisitions. Often, there are competing interests between the acquirer and the target as to how to structure the transaction, i.e. as a stock or asset acquisition. Effective representation is crucial to both determining which transaction structure is the best fit for the business’s needs and negotiating with the counter-party to ensure that the agreed upon structure fits those needs.
- Cross-border transactions. Transfers of assets to foreign subsidiaries or mergers between U.S. and foreign entities are fertile ground for potentially abusive tax avoidance. For that reason, generally, under IRC § 367, the familiar non-recognition provisions of §§ 351 and 361 are turned off in “outbound transactions” (where assets flow from the U.S. to a foreign country) such that cross border contributions of capital or mergers require recognition of built-in gain. In certain circumstances, recognition of built-in gain can be advantageous; at other times, it is disadvantageous. The attorneys at Fuerst Ittleman David & Joseph are experienced in analyzing potential cross-border transactions (both outbound and inbound) and, when beneficial, structuring transactions to avoid the imposition of gain under § 367.
- Transfer Pricing. Businesses with foreign subsidiaries may, from time to time, run into transfer pricing issues. A classic example of a transfer pricing issue arises when a U.S. parent sells its product to a foreign subsidiary in a low tax jurisdiction, which then sells the product in the market. By adjusting the inter-company price, it is possible to capture most, if not all, of the gain in the low tax jurisdiction. In that situation, the IRS, using its power under § 482 of the Internal Revenue Code, will likely claim that the price attributed to the inter-company transfer, did not follow economic reality and attribute a portion of the foreign gain to the U.S. parent. Transfer pricing cases can become complex quickly; apportioning gain or loss to economic activity in varying jurisdictions can be complex, fact intensive, and require the retention and advice of experts. The attorneys at Fuerst Ittleman David & Joseph have experience in both advance planning to avoid transfer pricing issues and defending IRS attempts to recast transactions.
- Establishment of Offshore Operations. The IRS has long taken a dim view toward attempts by U.S. taxpayers to defer the recognition of income through the use of foreign corporations. In particular, certain income earned by controlled foreign corporations must be immediately recognized by the U.S. owner of the corporation, rather than upon distribution of a dividend. This income is generally known as “subpart F” income. Often, however, there are legitimate business reasons to maintain foreign subsidiaries and operations overseas, which allow for the deferral of income in the overseas corporation. The attorneys at Fuerst Ittleman David & Joseph are experienced in structuring offshore operations to minimize the incurrence of subpart F income. Furthermore, in the offshore sales context, our attorneys are adept at creating the deferral of income through the use of export incentives, such as the privileges provided to domestic international sales corporations, which allows the largely tax free accumulation of export profits earned by corporations primarily devoted to offshore sales.
Regardless of the type of business transaction issue that one of our clients face, and regardless of the size of the transaction, Fuerst Ittleman David & Joseph treats each transaction with the utmost care and importance. The firm is small enough to be responsive to clients’ needs, yet experienced enough to handle the most complex transactions. The tax practice and corporate practice teams, working in collaboration, will strive to ensure that the transaction is completed to meet the clients’ goals in as prompt and efficient manner as possible.
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